Monday, December 30, 2013

If the gambler has no feedback from his bets because the casino reimburses his losses, then he will continue gambling wildly and losing spectacularly.Risk is an ever-present characteristic of life; it cannot be eliminated, it can only be masked or hedged. We know this intuitively, yet we blithely accept official assurances that risk can be eliminated by the monetary machinations of the Federal Reserve, the Central Bank of China, the Bank of Japan and the European Central Bank.To confuse masking risk with the elimination risk is the acme of hubris and the perfect setup for disaster. In my view, the global central bank response has been directed at masking risk and presenting this as the "solution" that has sent risk back to its lair, defeated. But cloaking risk does not eliminate it; official obfuscation merely pushes risk beneath the surface where it accumulates unseen.Once the built-up risk reaches criticality, it explodes in "unforeseen" volatility that is often triggered by a seemingly unimportant event.One way that risk is systemically and deliberately hidden is by separating it from the gain or loss that results from taking the risk. This is also called "moral hazard," and the example everyone now knows is private banks that "privatized profits and socialized losses" by keeping their outsized profits skimmed in the go-go years and transferring their staggering losses to the public ledger.From the point of view of risk analysis, the risk of losses from malinvestment and speculation were separated from the gains. The banks kept the gains but then diverted the losses (risk) to the taxpayers via the $14 trillion TARP bailout and $16 trillion in "secret" subsidies and give-aways only revealed by a FOIA release of 30,000 pages won by Bloomberg.We can understand this disconnect as the severing of the feedback loop from risk to gain. If the gambler has no feedback from his bets because the casino reimburses his losses, then he will continue gambling wildly and losing spectaularly. After all, why not?This explains why the Fed and the Obama administration will not just fail, but fail spectacularly: not only are they individually distant from the risks incurred by their policies, those entities they are protecting (the banking sector, the higher education cartel, sickcare, etc.) are also protected from risk.Without feedback (we might also call it the possibility of loss or defeat), the players and the system are both intrinsically doomed to failure. There is no other end-state possible if you start from this initial condition.Thanks to globe-trotting correspondent Toby B., who sent me the book and several other fascinating histories, I have read a deeply insightful history of the pivotal battle of Midway, June 1942: Shattered Sword: The Untold Story of the Battle of Midway.The book is unique among war histories in that it explores the culture and internal conflicts of the Japanese Imperial Navy which contributed (as initial conditions) to the unexpected defeat at Midway by the inferior forces of the American Navy.Having studied Japanese history, language, geography and literature in university, the culture of the Imperial Navy was not entirely new ground. But the internal conflicts over differing strategies in the Japanese central command and Imperial Navy were new and of great interest, for they reflected not just Japanese culture but (not unexpectedly) human nature.Japan's remarkably decisive successes in the first months of the Pacific war left the high command with the unusual problem of "what do we do next?" Having achieved all their tactical goals, debates raged over what to attempt next.Admiral Yamamoto, the chief architect (though by no means uncontested) of Japan's strategy, opted to draw out America's aircraft carriers into a "decisive battle"--the heart of Japanese Naval doctrine. He devised the Midway campaign to do exactly this.After such an amazing string of victories over the American, Dutch and British navies following Pearl Harbor, the idea of defeat did not enter the computations or the debates, nor did the idea that all the various strategies proposed were highly risky.The denial and disorientation caused by the catastrophic loss of Japan's four finest aircraft carriers in a single day did not deter the Japanese commanders from pressing on to Midway; their mindset did not allow for defeat, and so they had no choice but to press on to victory.Eventually Admiral Yamamoto conceded the campaign had failed to reach its objectives--destroy the U.S. aircraft carriers and capture Midway Island, and that pressing on would only endanger what was left of the Japanese fleet.All of this struck me as absolutely telling in regards to the Fed's campaign to restart the U.S. economy by lowering interest rates to zero and flooding the system with free, cheap money (liquidity). The strategy is simple: drive the cost of borrowing money so low that people will once again buy homes with 3% down payments and huge mortgages, and plow their money into the stock market, the asset class (along with real estate) which is inflated monthly as an official Fed policy.This is the Fed's strategy: drive "risk assets" like stocks up until some magical point is reached and households feel wealthy and confident again, and start borrowing and spending with abandon. The fact that only 10% of U.S. households own enough stock to expereince this "wealth effect" simply doesn't register in the Fed's mindset: risk has been eliminated and thus victory is assured.The idea that this strategy is flawed does not occur to the Fed leadership; this mindset is so narrow and atrophied that the Fed has no alternative but to "press on to victory," even as the ship is sinking beneath them.The same can be said of President Obama, who appears unable to grasp that his policies have been catastrophically misguided.I suspect 2014 will be the year--after five long years of the same battle plan--that the total and complete failure of this strategy will be revealed to all. The Fed and Obama administration are steaming their flagships toward the booming guns on the horizon, confident of victory even as the undetected squadrons of risk are high above, setting their bombsites on the foaming white wakes of hubris below.This essay was drawn from Musings Report 47, one of the weekly reports sent exclusively to subscribers and major contributors (i.e. those who contribute $50 or more annually).

The Nearly Free University and The Emerging Economy:The Revolution in Higher Education

Reconnecting higher education, livelihoods and the economy

With the soaring cost of higher education, has the value a college degree been turned upside down? College tuition and fees are up 1000% since 1980. Half of all recent college graduates are jobless or underemployed, revealing a deep disconnect between higher education and the job market.

It is no surprise everyone is asking: Where is the return on investment? Is the assumption that higher education returns greater prosperity no longer true? And if this is the case, how does this impact you, your children and grandchildren?

We must thoroughly understand the twin revolutions now fundamentally changing our world: The true cost of higher education and an economy that seems to re-shape itself minute to minute.

The Nearly Free University and the Emerging Economy clearly describes the underlying dynamics at work - and, more importantly, lays out a new low-cost model for higher education: how digital technology is enabling a revolution in higher education that dramatically lowers costs while expanding the opportunities for students of all ages.

The Nearly Free University and the Emerging Economy provides clarity and optimism in a period of the greatest change our educational systems and society have seen, and offers everyone the tools needed to prosper in the Emerging Economy.

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify. We will cover the five core reasons why things are falling apart:

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Once we accept responsibility, we become powerful.

Sunday, December 29, 2013

Austerity and crisis are not negative--they are the only dynamics that force smart thinking and the re-alignment of values, resources and strategic goals.Unsurprisingly, the status quo position on austerity (real or imagined)--that it's terribly, horribly negative--is precisely backwards: austerity is the one essential positive motivator of productive strategic planning, prioritization and decision-making.By austerity, I mean a broad-based definition: when resources are not up to the demands of the status quo. In other words, austerity is a relative term; for the household accustomed to a lifestyle that requires $15,000 a month, a cut to $10,000 a month is a drastic austerity budget, even though the $10,000 per month budget is insanely bloated to those managing on $3,000 per month.The dynamic of austerity being required to force productive planning, prioritization and decision-making is scale-invariant: that is, it applies to every bit of the spectrum, from individuals to couples to households to small enterprises to communities to corporations to government agencies to nation-states.For a military machine accustomed to expanding outlays and a $700+ billion annual budget, a cut of $50 billion is viewed as extreme austerity--even though it wasn't that long ago that the Pentagon budget was well under $500 billion.An insightful article in the latest issue of Foreign Affairs describes how austerity has in the past forced the U.S. military to realign resources with goals via hardnosed, realistic, productive strategic thinking: How Budget Crises Have Improved U.S. Strategy.When there is funding for every program and response to every potential threat, money is thrown around without regard to strategic planning, which is the process of assessing and ranking risks and threats and formulating a strategy that prioritizes resources and goals: in other words, smart planning.the author of the essay neatly summarizes this process:

"In World War II, the paucity of the resources on hand actually forced U.S. policymakers to make tough but smart choices. A combination of austerity and crisis helped forge a core strategic concept, a new threat assessment, an appreciation of the indissoluble links between interests and values, and a calibration of priorities."

The dynamic of austerity coupled with crisis is the key driver of smart, strategic planning for individuals, households, communities, organizations, enterprises and nations; without austerity/crisis-driven assessment, prioritizing and planning, resources are squandered on impractical, low-yield distractions that have been jumbled up with key priorities by muddled, politically-expedient thinking.If you have enough borrowing power to fund everything that every politically potent constituency wants, you are ontologically (inherently) ill-prepared for crisis. Muddled strategic planning leads to a confusion of competing priorities, none of which are integrated in a grand strategy with clear goals, priorities and planning.Historical analogies abound; here is one. In a previous Musings (When Risk Is Separated From Gain, The System Is Doomed, Musing Report 47, 2011), I discussed Japan's muddled plan for the Midway campaign in World War II, a convoluted political marriage of competing Army and Navy plans. Rather than clarify the goal and prioritize the means to accomplish it, the Japanese high command attempted to please every key power center by combining each constituency's ideas and goals into a complex tactical plan that worked politically but which was militarily diffused and internally inconsistent. Junior officers' well-founded critiques of the plan were suppressed by top brass fearing political blowback.The end result was a completely avoidable military catastrophe that essentially ended Japan's hope of prevailing in the war: four aircraft carriers sunk, the cream of the Navy's carrier pilot cadre lost. These losses forced a shift of strategy from expansion and victory to defense and a vain hope for a favorable settlement of hostilities.This failure to force clear strategic thinking was the natural result of Japan's string of early victories, which generated a widespread hubris in the leadership, i.e. the belief that available resources could magically accomplish any goal conjured by central command.This is a precise analogy to the U.S., not just militarily, but every facet of its society and economy: politically expedient, kick-the-can-down-the-road "no limits on anything" means no strategy, no priorities, no planning and ultimately, no clear thinking at the top, which then guarantees complete failure.This perfectly captures the essence of the Affordable Care Act (ACA or ObamaCare) monstrosity: a program intended to satisfy or placate every politically powerful constituency is a muddled, complicated mess doomed to systemic failure on multiple levels.The ACA was ultimately a political plan which ignored (thanks to a complete absence of austerity) the actual resources of the nation and its bloated, inefficient, perverse-incentivized healthcare system.Austerity and crisis are not negative--they are the only dynamics that force smart thinking and the re-alignment of values, resources and strategic goals. Trying to fund everything to please or placate every powerful constituency ends up failing everyone in catastrophic fashion.This essay was drawn from Musings Report 51, one of the weekly reports sent exclusively to subscribers and major contributors (i.e. those who contribute $50 or more annually).

The Nearly Free University and The Emerging Economy:The Revolution in Higher Education

Reconnecting higher education, livelihoods and the economy

With the soaring cost of higher education, has the value a college degree been turned upside down? College tuition and fees are up 1000% since 1980. Half of all recent college graduates are jobless or underemployed, revealing a deep disconnect between higher education and the job market.

It is no surprise everyone is asking: Where is the return on investment? Is the assumption that higher education returns greater prosperity no longer true? And if this is the case, how does this impact you, your children and grandchildren?

We must thoroughly understand the twin revolutions now fundamentally changing our world: The true cost of higher education and an economy that seems to re-shape itself minute to minute.

The Nearly Free University and the Emerging Economy clearly describes the underlying dynamics at work - and, more importantly, lays out a new low-cost model for higher education: how digital technology is enabling a revolution in higher education that dramatically lowers costs while expanding the opportunities for students of all ages.

The Nearly Free University and the Emerging Economy provides clarity and optimism in a period of the greatest change our educational systems and society have seen, and offers everyone the tools needed to prosper in the Emerging Economy.

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify. We will cover the five core reasons why things are falling apart:

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Once we accept responsibility, we become powerful.

Thursday, December 26, 2013

Debt is serfdom, capital in all its forms is freedom. The only leverage available to all is extreme frugality in service of accumulating productive capital.There are only three ways to better oneself financially: marry someone with money, inherit money or accumulate capital/savings and invest it in productive assets. (We'll leave out lobbying the Federal government for a fat contract, faking disability, selling derivatives designed to default and other criminal activities.)The only way to accumulate capital to invest is to spend considerably less than you earn. For a variety of reasons, humans seem predisposed to spend more as their income rises. Thus the person making $30,000 a year imagines that if only they could earn $100,000 a year, they could save half of their net income. Yet when that happy day arrives, they generally find their expenses have risen in tandem with their income, and the anticipated ease of saving large chunks of money never materializes.What qualifies as extreme frugality? Saving a third of one's net income is a good start, though putting aside half of one's net income is even better.The lower one's income, the more creative one has to be to save a significant percentage of one's net income. On the plus side, the income tax burden for lower-income workers is low, so relatively little of gross income is lost to taxes.The second half of the job is investing the accumulated capital in productive assets and/or enterprises. The root of capitalism is capital, and that includes not just financial capital (cash) but social capital (the value of one's networks and associations) and human capital (one's skills and experience and ability to master new knowledge and skills).Cash invested in tools and new skills and collaborative networks can leverage a relatively modest sum of cash capital into a significant income stream, something that cannot be said of financial investments in a zero-interest rate world.We hear a lot about the rising cost of college and the impossibility of getting a degree without loans or tens of thousands of dollars contributed by parents. I think my own experience is instructive, as there is another path: extreme frugality.At 19, my two sets of parents were unable to provide me with more than a rust-bucket old car. My father sent me an airline ticket to visit him, but nobody ponied up any cash for tuition, books, or living expenses.Step One was eliminating housing costs until I earned enough to pay rent. By good fortune, I was able to secure a work-trade housing situation: I was given a room filled with boxes of accounting records, and a path through the boxes to a bathroom and tiny kitchenette in trade for yard work.Step Two: cut all other expenses to the bone. Since I was working for a remodeling contractor, I needed the car to get to the various jobsites, but I bicycled whenever possible to save on gasoline. I prepared all my own meals and avoided buying snacks, drinks, etc. until my income rose enough to swing such luxuries. I can count the number of drinks or meals I bought on campus in four years on one hand.Music purchased: none. (We played our own music or listened to the radio on the jobsite.) Clothes purchased new: none. (That's what church jumble sales/bazaars are for: $1 shirts, etc.) And so on.Step Three: find a job with upside earnings and skills. I'd worked in snack bars and mowed lawns, but construction opened up opportunities to advance my skills and gain sufficient proficiency to deserve a raise in pay.Since I wasn't guaranteed any opportunity for advancement, I volunteered to work Saturdays for my bosses or anyone else on the crew who had sidework on the weekends. I volunteered my construction services to community groups to gain experience (there's nothing like being responsible for the project, as opposed to just following orders) and open access to new networks of productive, accomplished people.For example, I rebuilt the rotted redwood rear steps to the historic Agee House in the back of Manoa Valley for free. (Sadly, this wonderful building burned down a few years later.)In business, the word "hustle" has the negative connotation of high pressure sales or a scam. In sports, it has a positive connotation of devoting more energy and effort as a means of compensating for lower skills or physical size. Step Three requires hustle: when you don't have any advantages of capital, connections or skills, you have to acquire those by hustle and initiative.Step Four: apply for obscure, small-sum scholarships. $500 may not sound like a lot, but it means competition will be lower and if you get it, that's $500 you don't have to earn. As you build your networks in the community, put the word out you're looking for small scholarships for next semester's tuition. In general, people tend to respond more positively to helping you with a specific goal rather than an open-ended or undefined goal such as "I need money for college."Step Five: work productively and ambitiously, i.e. work a lot but work smart. It never occurred to me that working 25+ hours a week and taking a full load of classes (4-5 classes and 15+ credits a semester) was something to bemoan--I was having a great time, and earned a 3.5 grade point average and my B.A. in four years.60-hour work weeks should be considered the minimum effort necessary--but only if those hours are 100% productive work, not hours interrupted with games, phone calls, goofing off, etc. Those 60 hours are flat-out, power-out-the-work hours, not hours diluted by half-effort, distractions, etc.Step Six: learn to do things yourself that cost money, such as maintaining your car. It's not that hard to change the oil and other basics of maintenance.If you push yourself and maintain a disciplined life, huge amounts of work can be ground through in a few hours. This is as true of digging a ditch as it is of plowing through texts and writing papers.Tuition at the state university I attended (the University of Hawaii at Manoa) has risen enormously in the decades since I worked my way through college (roughly $9,000 a year now), but it's still possible to work one's way through if the student pursues all six steps assiduously and with perseverance and hustle and secures full-time work in summers.One reason I did not bemoan working long hours and practicing extreme frugality was that this was still the default setting in a few dwindling enclaves of our culture and economy. The idea that you could borrow money for everything you wanted had not yet conquered the culture and economy: thrift in service of big goals was still a cultural norm.In other words, what I did wasn't heroic or unusual; it was the norm.I should mention that my university years overlapped with the deepest recession (at that time) since the Great Depression: 1973-74. Work was hard to come by, gasoline skyrocketed in price, and inflation started to outpace wages, especially in the low-wage jobs typically available to college students.It was not a cakewalk by any means.The upside of relentlessly pursuing Steps One - Six is tremendous: personal integrity, financial independence, and the other powerful freedoms that accrue to these foundations. Measured by income and things I owned, I was "poor." But measured by independence and by skills and networks gained, I was wealthy in many important ways.Extreme frugality enabled me to not just finish college in four years but to buy a (cheap) parcel of land while still a student with cash and have a substantial savings account by graduation day.I don't look back on those years of voluntary deprivation in service of independence, freedom, knowledge, and social and human capital as "poor me:" I see them as the extremely positive, productive template that I have followed in the decades since. I never did marry or inherit money, and so whatever I have now is the direct result of extreme frugality in service of integrity, independence and the accrual of capital that can be productively invested.The only leverage available to all is extreme frugality in service of accumulating savings that can be productively invested in building human, social and financial capital.Debt is serfdom, capital in all its forms is freedom.Debt = Serfdom (April 2, 2013)How Frugal Are You? (August 7, 2010)

The Nearly Free University and The Emerging Economy:The Revolution in Higher Education

Reconnecting higher education, livelihoods and the economy

With the soaring cost of higher education, has the value a college degree been turned upside down? College tuition and fees are up 1000% since 1980. Half of all recent college graduates are jobless or underemployed, revealing a deep disconnect between higher education and the job market.

It is no surprise everyone is asking: Where is the return on investment? Is the assumption that higher education returns greater prosperity no longer true? And if this is the case, how does this impact you, your children and grandchildren?

We must thoroughly understand the twin revolutions now fundamentally changing our world: The true cost of higher education and an economy that seems to re-shape itself minute to minute.

The Nearly Free University and the Emerging Economy clearly describes the underlying dynamics at work - and, more importantly, lays out a new low-cost model for higher education: how digital technology is enabling a revolution in higher education that dramatically lowers costs while expanding the opportunities for students of all ages.

The Nearly Free University and the Emerging Economy provides clarity and optimism in a period of the greatest change our educational systems and society have seen, and offers everyone the tools needed to prosper in the Emerging Economy.

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify. We will cover the five core reasons why things are falling apart:

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Once we accept responsibility, we become powerful.

Propaganda, phony fixes and more debt can only cover the widening gap between fiscal reality and official fantasy for so long.So what else besides the potential for another global financial meltdown bears watching in 2014? Here are a few worthy prospects. Continuing our end-of-the-year tradition of exploring themes that have disruptive potential in the coming year, Gordon Long and I discuss a half-dozen such topics in 2014 Themes: CHS with Gordon T. Long(28 minutes).My short list is centered not on one-time crises or potential black swans but on long-festering systemic problems that cannot be fixed within the current status quo, and thus they are destined to continue eroding systemic resilience. Kicking the can down the road and phony accounting "solutions" fix nothing, and so these systemic problems will eventually explode into crises that cannot be tamped down with the usual fiscal and monetary tricks.Student loans and the impossible-to-solve conflict between skyrocketing local government pension and healthcare costs and delivering services to taxpayers/residents are both prime examples. Something's got to give in both of these bubbling pressure cookers, and propaganda, phony fixes and more debt can only cover the widening gap between fiscal reality and official fantasy for so long.Five years of phony fixes have gotten us to 2013; I doubt the same illusions and tricks will get the global economy through 2014-2015 unscathed.Gordon did an excellent companion "Themes for 2014" program with John Rubino which I highly recommend; you can find this program as well as other recent shows on the the Macro Analytics home page.

The Nearly Free University and The Emerging Economy:The Revolution in Higher Education

Reconnecting higher education, livelihoods and the economy

With the soaring cost of higher education, has the value a college degree been turned upside down? College tuition and fees are up 1000% since 1980. Half of all recent college graduates are jobless or underemployed, revealing a deep disconnect between higher education and the job market.

It is no surprise everyone is asking: Where is the return on investment? Is the assumption that higher education returns greater prosperity no longer true? And if this is the case, how does this impact you, your children and grandchildren?

We must thoroughly understand the twin revolutions now fundamentally changing our world: The true cost of higher education and an economy that seems to re-shape itself minute to minute.

The Nearly Free University and the Emerging Economy clearly describes the underlying dynamics at work - and, more importantly, lays out a new low-cost model for higher education: how digital technology is enabling a revolution in higher education that dramatically lowers costs while expanding the opportunities for students of all ages.

The Nearly Free University and the Emerging Economy provides clarity and optimism in a period of the greatest change our educational systems and society have seen, and offers everyone the tools needed to prosper in the Emerging Economy.

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify. We will cover the five core reasons why things are falling apart:

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Once we accept responsibility, we become powerful.

Wednesday, December 25, 2013

Close friends, a healthy homemade meal, guitars and fun: it doesn't get any better than this.In the spirit of Christmas sharing, here is a musical offering. Though this is not a Christmas song per se, it was created in the spirit of sharing the gifts of friendship, food, fun and music.Close friends, a healthy, homemade meal, guitars and fun: it doesn't get any better than this:Here's the song CHS and CC recorded: Hamakua Dream (3:05).Those with little interest in making and recording music can stop reading....Our goal (arising from both preference and time constraints) was to capture the spontaneity and freshness (and yes, the imperfections) of a jam, while using the tools of the trade (multiple tracks and various guitar effects) to enhance the dreaminess of the song's cascading open-string chords.After adjusting a few of the notes/beats, we overlaid two rhythm guitar tracks, each with a different effect, to create the song's basic musical theme. A bass guitar track added depth, and then we each played lead guitar in a live double-lead.A short interval we called a "palate cleanser" serves to separate the song's parts. I am wondering if other guitarists will discern the absurdly easy root of this transitional "palate pleaser."We hope you enjoy our little musical offering.

The Nearly Free University and The Emerging Economy:The Revolution in Higher Education

Reconnecting higher education, livelihoods and the economy

With the soaring cost of higher education, has the value a college degree been turned upside down? College tuition and fees are up 1000% since 1980. Half of all recent college graduates are jobless or underemployed, revealing a deep disconnect between higher education and the job market.

It is no surprise everyone is asking: Where is the return on investment? Is the assumption that higher education returns greater prosperity no longer true? And if this is the case, how does this impact you, your children and grandchildren?

We must thoroughly understand the twin revolutions now fundamentally changing our world: The true cost of higher education and an economy that seems to re-shape itself minute to minute.

The Nearly Free University and the Emerging Economy clearly describes the underlying dynamics at work - and, more importantly, lays out a new low-cost model for higher education: how digital technology is enabling a revolution in higher education that dramatically lowers costs while expanding the opportunities for students of all ages.

The Nearly Free University and the Emerging Economy provides clarity and optimism in a period of the greatest change our educational systems and society have seen, and offers everyone the tools needed to prosper in the Emerging Economy.

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify. We will cover the five core reasons why things are falling apart:

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Once we accept responsibility, we become powerful.

Monday, December 23, 2013

"If we expect an economic theory to behave like a theory of physics, with non-trivial predictions about the future, we're never going to get one."Back in August I explored Why Isn't There a Demonstrably Correct Economic Theory?. Many commentators have noted the obvious, that economics is a pseudo-science rather than a real science: beneath the fancy quantification and math, economics is fundamentally the study of human behavior, and that complex mix of dynamics cannot be reduced to a tidy econometric model that spits out accurate predictions.One key element of science is that the results must be reproducible, that is, the same experiment/conditions should yield the same results time and again. I suspect that economic models are not applicable across all times and situations; a model might "work" in one era and in a very specific set of circumstances, but fail in another era or in a similar set of circumstances.Since human behavior is based in culture as well as in naturally selected (genetically driven) behavior, then cultural milieus and values obviously play critical roles in shaping economic behaviors.So presenting an economic model as "scientific" and quantifiable is in effect claiming that the bubbling stew of human culture can be reduced to quantifiable models that will yield predictions that are accurate in the real world. This is clearly false, as culture is not a static set of objects, it is a constantly shifting interplay of feedback loops.This helps explain why human behavior is so unpredictable. Virtually no one successfully predicted World War I in 1909, and no one predicted the collapse of the U.S.S.R. in 1985.Another reason all economic theories fail as scientifically verifiable models is that economics boils down to a very simple dynamic: those in power issue financial claims on resources as a "shortcut" way of gaining control of the resources without actually having to produce the resources or earn the wealth via labor and innovation.I think this is the one fundamental dynamic of economics, and it does not lend itself to reductionist models.Longtime correspondent Chuck D. recently explained why economics will never be predictive (i.e. a real science) like physics:

If we expect an economic theory to behave like a theory of physics, with non-trivial predictions about the future, we're never going to get one. If, on the other hand, we accept economic theories which explain why we'll never get the kind of economic theory we'd like to have, the kind that would support investment decisions and government policy formulation, we can formulate THAT kind of theory. (If you want a physicist to decide whether light is a stream of particles or a pattern of waves, you're not going to get an answer.)

Von Neumann and Morgenstern came pretty close when they applied mathematical game theory to economic behavior. In game theory terms, if there existed an economic theory which provided any kind of advantage to those who understood it, either it would be kept a secret (so as not to give up the advantage), or the "game" itself would adapt to invalidate the theory.

The reason for the failure of economics to produce "the theory we'd like to have" is not merely that people are complex, just as modern physics doesn't say that "electrons are really hard to locate;" the problem is that any conceivable process for observing the electron disturbs its position and/or momentum, invalidating the observation. A theory of economics cannot be both useful and well-known. (Can we call this a statement of "meta-theory"?)

So, the competitive (game-like) nature of economics means that the usual incremental accumulation of knowledge that applies in natural science is impossible. To succeed in the market, I need to have better information and/or interpretation than at least one other trading opponent (oops, I almost said "trading partner"!) There are two ways for me to have better knowledge than you do: either I think hard about the data I gather (and keep the results to myself), or I promulgate disinformation and misinterpretation (see "talking my book").

In other words, I don't need to be smart if I can make you stupid. It's just the opposite of science. It's not even necessary for everyone to proliferate misinformation, as long as there's enough of it around to create uncertainty about the truth. (You and I, for example, can see things quite clearly, and still not turn the tide of madness around us.)

The Nearly Free University and The Emerging Economy:The Revolution in Higher Education

Reconnecting higher education, livelihoods and the economy

With the soaring cost of higher education, has the value a college degree been turned upside down? College tuition and fees are up 1000% since 1980. Half of all recent college graduates are jobless or underemployed, revealing a deep disconnect between higher education and the job market.

It is no surprise everyone is asking: Where is the return on investment? Is the assumption that higher education returns greater prosperity no longer true? And if this is the case, how does this impact you, your children and grandchildren?

We must thoroughly understand the twin revolutions now fundamentally changing our world: The true cost of higher education and an economy that seems to re-shape itself minute to minute.

The Nearly Free University and the Emerging Economy clearly describes the underlying dynamics at work - and, more importantly, lays out a new low-cost model for higher education: how digital technology is enabling a revolution in higher education that dramatically lowers costs while expanding the opportunities for students of all ages.

The Nearly Free University and the Emerging Economy provides clarity and optimism in a period of the greatest change our educational systems and society have seen, and offers everyone the tools needed to prosper in the Emerging Economy.

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify. We will cover the five core reasons why things are falling apart:

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Once we accept responsibility, we become powerful.

Sunday, December 22, 2013

How can all those checklists of highly successful people work when a majority of competitors are following them?Back in June I explored The Unknown Unknowns and Survivor Bias. It turns out that listening to the handful of people who make it big is intrinsically misleading: Survivorship bias: why 90% of the advice about writing is BS.Here's how this works: big-bucks Author Z says, here are the 10 steps you need to take to become as successful as me. The list always mentions perseverance, being nice to your readers, writing 1,000 words a day and so on.The 99.9% of writers/authors who make less than $10,000 a year from their writing (and the 99% who make less than $1,000) take this list as a script or program that if followed, will yield great success. But the 99% follow the script and do the 10 things and discover they are still unknown and not making any money.The point is that nobody asks the 99% who fail to make it big what they did, or try to analyze what they did that prevented their success.The numbers of people who become successful in these sorts of high-competition careers is vanishingly small--hedge fund managers are an example, along with musical acts, artists and writers. A handful at the top make most of the money, a relative few make some money (let's say a middle-class income) and then 99% make near-zero.Longtime correspondent B.C. recently sent me an analysis of how many mutual fund managers outperformed a "dumb" low-cost index fund. B.C. found that 66 managers out of 26,507 outperformed the SPX over 5 years. That mirrors the distribution of outsized success among hedge fund managers, a few of whom net $500 million each annually while the rest underperform a plain old index fund.The conclusion is that luck is the ultimate factor in these signal-noise levels of success, and being in the right place at the right time with the right product/idea can't be replicated by following a script or list of tips.Another take on the same concept is elegantly explained in Survivorship Bias The Misconception: You should study the successful if you wish to become successful.The basic idea here is that studying the aircraft that come back riddled with holes from bombing missions leads us astray when we try to analyze the damage: what would really help us is studying the planes that were shot down, but they are unavailable for study.the same principle applies to restaurants: the few that become roaring successes are endlessly studied, but the causes of success and failure are actually buried in the stories of all those that failed and close their doors. But nobody collects that data, for a number of reasons, including the study of failure isn't sexy and won't sell magazines.We know that we learn from mistakes and failures, yet the study of failure is never recorded or saved unless the company or individual "came back from the dead" and the entire chain of events from near-death to recovery are saved for study.Aaron Krowne of the ground-breaking Implode-o-Meter sites recently submitted an insightful commentary on survivorship bias:

There's another aspect of the problem you mention in your "survivorship bias" post. One can, in theory, accept the premise that one can learn most about a successful exemplar, at the point in time they succeeded, by studying that exemplar. After all, surely we will recognize its/his/her unique attributes.

But even when that is the case, there is a second problem, which that pretty much squashes all hope of replicating their success: in fields such as markets, or any which is adaptive (so virtually every competitive human endeavor), the milieux responds to the success, and so the same attributes or actions cannot achieve the same result the next time around.

Even worse, when the supposed "formula" is communicated to the masses, the effect is compounded, as you now have the bulk of the "agents" in the market acting on that same formula. In markets, we often call this being "priced in".

Conclusion: whether or not the "formula" is merely an example of survivorship bias or conveys genuine working advantage from a past point in time, the common man cannot expect to replicate an exemplar's success by copying that formula.

He can of course likely improve his chances by increasing his discipline over the (inherently un-disciplined) average competitor (after all, remember that most people don't even read, to any meaningful extent), but there is a wide gulf between being above-average and being a superstar, independently wealthy, a "top dog", etc.

Corollary: the average man cannot ever hope to win with "investments"(or the world of finance in general), but must be content with savings. Unfortunately, in the absence of sound money, we don't really have "savings" anymore, which is why the whole world has effectively been converted to economic sheep for the slaughter, a kind of "superadvantage" of those who run our economic system.

Thank you, Aaron, for this thought-provoking analysis. As Aaron noted, how can all those checklists of highly successful people work when a majority of competitors are following them? I tend to think Jerry Garcia's suggestion has the most practical value for most of us: "You do not merely want to be considered just the best of the best. You want to be considered the only one who does what you do.”

The Nearly Free University and The Emerging Economy:The Revolution in Higher Education

Reconnecting higher education, livelihoods and the economy

With the soaring cost of higher education, has the value a college degree been turned upside down? College tuition and fees are up 1000% since 1980. Half of all recent college graduates are jobless or underemployed, revealing a deep disconnect between higher education and the job market.

It is no surprise everyone is asking: Where is the return on investment? Is the assumption that higher education returns greater prosperity no longer true? And if this is the case, how does this impact you, your children and grandchildren?

We must thoroughly understand the twin revolutions now fundamentally changing our world: The true cost of higher education and an economy that seems to re-shape itself minute to minute.

The Nearly Free University and the Emerging Economy clearly describes the underlying dynamics at work - and, more importantly, lays out a new low-cost model for higher education: how digital technology is enabling a revolution in higher education that dramatically lowers costs while expanding the opportunities for students of all ages.

The Nearly Free University and the Emerging Economy provides clarity and optimism in a period of the greatest change our educational systems and society have seen, and offers everyone the tools needed to prosper in the Emerging Economy.

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify. We will cover the five core reasons why things are falling apart:

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Once we accept responsibility, we become powerful.

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